Amidst consistently high economic growth, a visible consumer culture is emerging in urban China. New research by the McKinsey Global Institute suggests that while global companies have fixated on serving the country’s most affluent urban consumers in recent years, they should broaden their vision to include the large body of middle-class consumers expected to emerge over the next two decades.

China’s wealthiest households, currently concentrated in large cities, have driven the country’s purchases of luxury goods, which exceeded US $6 billion in 2004. The McKinsey survey, however, indicates that today’s working-class consumers, who remain dispersed across cities and are still relatively poor, will become tomorrow’s middle-class buyers. By 2025, urban Chinese households will comprise one of the world’s largest consumer markets, spending about 20 trillion RMB ($2.5 trillion) annually, or as much as all Japanese households do today. The emergence of the new middle class will boost incomes across all urban segments, helping to narrow China’s widening income gap, the survey notes.

Projections indicate that housing and health care will be among the most significant categories of China’s rapidly rising consumption. Chinese are expected to allocate a combined 16.6 percent of their household budgets to shelter and utilities by 2025. During this period, private health expenditures by urban consumers are also expected to grow by more than 11 percent annually, creating huge opportunities for health care providers, insurance companies, and pharmaceutical companies, the survey says.

China’s consumer class totaled some 240 million people in 2002, representing only 19 percent of the population, according to the Worldwatch Institute’s State of the World 2004 report. The Chinese government has adopted a variety of measures to stimulate domestic spending, including consolidating national holidays to significantly increase tourism.

But some analysts argue that the government and businesses should specifically target the 24–45 year-old segment of the urban population, offering more non-luxury goods and appealing to their unique consumer attributes. A recent McKinsey survey of China’s teenage consumers notes clear differences in behavior from their Western counterparts, with Chinese youth displaying strong national feelings and preferences for traditional values while also valuing modern products and name brands. In addition, China’s teens spend a greater share of their spare time reading books, newspapers, and magazines than young people elsewhere, noted the survey.